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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Hemisphere Media Group Inc | NASDAQ:HMTV | NASDAQ | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 7.15 | 6.93 | 7.14 | 0 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-35886
HEMISPHERE MEDIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 80-0885255 |
(State or other jurisdiction of incorporation or | (I.R.S. Employer |
Hemisphere Media Group, Inc. 4000 Ponce de Leon Boulevard Suite 650 Coral Gables, FL | 33146 |
(Address of principal executive offices) | (Zip Code) |
(305) 421-6364
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol(s) |
| Name of Each Exchange on Which Registered |
Class A common stock, par value $0.0001 per share | HMTV | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Class of Stock |
| Shares Outstanding as of August 4, 2022 |
Class A common stock, par value $0.0001 per share | 20,827,861 shares | |
Class B common stock, par value $0.0001 per share | 19,720,381 shares |
HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 30, 2022
(Unaudited)
2
PART I
Unless otherwise indicated or the context requires otherwise, in this disclosure, references to the “Company,” “Hemisphere,” “registrant,” “we,” “us” or “our” refers to Hemisphere Media Group, Inc., a Delaware corporation and, where applicable, its consolidated subsidiaries; “Business” refers collectively to our consolidated operations; “Cable Networks” refers to our Networks (as defined below) with the exception of WAPA and WAPA Deportes; “Canal 1” refers to a joint venture among us and Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.S. and NTC Nacional de Television y Comunicaciones S.A. to operate a broadcast television network in Colombia; “Centroamerica TV” refers to HMTV Centroamerica TV, LLC, a Delaware limited liability company; “Cinelatino” refers to Cine Latino, Inc., a Delaware corporation; “Distributors” refers collectively to satellite systems, telephone companies (“telcos”), and cable multiple system operators (“MSO”s), the MSO’s affiliated regional or individual cable systems, other MVPDs (as defined below), and where applicable, app distribution platforms; “MarVista” refers to Mar Vista Entertainment, LLC, a Delaware limited liability company; “MVPDs” refers to multi-channel video distributors, such as cable, satellite and telecommunications companies, and where applicable, virtual MVPDs as well as non-facilities based platforms; “MVS” refers to Grupo MVS, S.A. de C.V., a Mexican Sociedad Anonima de Capital Variable (variable capital corporation) and its affiliates, as applicable; “Networks” refers collectively to WAPA, WAPA Deportes, WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana; “Nielsen” refers to Nielsen Media Research; “Pantaya” refers to Pantaya, LLC, a Delaware limited liability company, and its wholly owned subsidiaries; “Pasiones” refers collectively to HMTV Pasiones US, LLC, a Delaware limited liability company, and HMTV Pasiones LatAm, LLC, a Delaware limited liability company; “REMEZCLA” refers to Remezcla, LLC, a New York limited liability company; “Second Amended Term Loan Facility” refers to our Term Loan Facility amended on February 14, 2017 as set forth on Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021; “Snap Media” refers to Snap Global, LLC, a Delaware limited liability company and its wholly owned subsidiaries; “Television Dominicana” refers to HMTV TV Dominicana, LLC, a Delaware limited liability company; “Term Loan Facility” refers to our term loan facility amended on July 31, 2014 as set forth on Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021; “Third Amended Term Loan Facility” refers to our Term Loan Facility amended on March 31, 2021 as set forth on Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021; “WAPA” refers to Televicentro of Puerto Rico, LLC, a Delaware limited liability company; “WAPA America” refers to WAPA America, Inc., a Delaware corporation; “WAPA Deportes” refers to a sports television network in Puerto Rico operated by WAPA; “WAPA.TV” refers to a news and entertainment website in Puerto Rico operated by WAPA; “United States” or “U.S.” refers to the United States of America, including its territories, commonwealths and possessions.
FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”), including the exhibits attached hereto, future filings by us with the Securities and Exchange Commission, our press releases and oral statements made by, or with the approval of, our authorized personnel, that relate to our future performance or future events, may contain certain statements about Hemisphere Media Group, Inc. (the “Company”) and its consolidated subsidiaries that do not directly or exclusively relate to historical facts. These statements are, or may be deemed to be, “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
These forward-looking statements are necessarily estimates reflecting the best judgment and current expectations, plans, assumptions and beliefs about future events (in each case subject to change) of our senior management and management of our subsidiaries (including target businesses) and involve a number of risks, uncertainties and other factors, some of which may be beyond our control that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “could,” “might,” “expect,” “positioned,” “strategy,” “future,” “potential,” “forecast,” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These include, but are not limited to, the Company’s future financial and operating results (including growth and earnings), plans, objectives, expectations and intentions and other statements that are not historical facts.
We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
3
Forward-looking statements are not guarantees of performance. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. In addition to the risk factors described in “Item 1A-Risk Factors” in this Quarterly Report on Form 10-Q, those factors include:
| ● | the deterioration of general economic conditions, political instability, social unrest, and public health crises, such as the occurrence of a global pandemic like COVID-19, including measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties, recent increases in, and any additional waves of, COVID-19 cases, new variants of the virus, such as the Delta or Omicron variant and their subvariants, as well as the availability and efficacy of a vaccine and treatments for the disease and whether individuals choose to vaccinate themselves, either nationally or in the local markets in which we operate, including, without limitation, in the Commonwealth of Puerto Rico; |
| ● | Puerto Rico’s political climate, as well as delays in the pace of disbursement of earmarked federal funds; |
| ● | the effects of extreme weather and climate events on our consolidated operations, as well as our counterparties, customers, employees, third-party vendors and suppliers; |
| ● | changes in technology, including changes in the distribution and viewing of television programming, including expanded deployment of personal video recorders, subscription and advertising video on-demand, internet protocol television, mobile personal devices and personal tablets and their impact on subscription and television advertising revenue; |
| ● | the reaction by advertisers, programming providers, strategic partners, the Federal Communications Commission (“FCC”) or other government regulators to businesses that we acquire; |
| ● | the potential for viewership of our Networks’ or Pantaya’s programming to decline or unexpected reductions in the number of subscribers to our Networks or Pantaya; |
| ● | the risk that we may fail to secure sufficient or additional advertising and/or subscription revenue; |
| ● | the inability of advertisers or affiliates to remit payment to us in a timely manner or at all; |
| ● | the risk that we may become responsible for certain liabilities of the businesses that we acquire or joint ventures we enter into; |
| ● | future financial performance, including our ability to obtain additional financing in the future on favorable terms; |
| ● | the failure of our Business to produce projected revenues or cash flows; |
| ● | reduced access to capital markets or significant increases in borrowing costs; |
| ● | our ability to successfully manage relationships with customers and Distributors, including satellite systems, telephone companies (“telcos”), app distribution platforms, as applicable, and cable multiple system operators (“MSO”s), and the MSO’s affiliated regional or individual cable systems) and other important third parties; |
| ● | continued consolidation of Distributors in the marketplace; |
| ● | a failure to secure affiliate agreements or the renewal of such agreements on less favorable terms; |
| ● | disagreements with our Distributors over contract interpretation; |
| ● | our success in acquiring, investing in and integrating businesses; |
| ● | the outcome of any pending or threatened litigation; |
4
| ● | the loss of key personnel and/or talent or expenditure of a greater amount of resources attracting, retaining and motivating key personnel than in the past; |
| ● | strikes or other union job actions that affect our operations, including, without limitation, failure to renew our collective bargaining agreement on mutually favorable terms; |
| ● | the failure or destruction of satellites or transmitter facilities that we depend upon to distribute our Networks; |
| ● | uncertainties inherent in the development of new business lines and business strategies; |
| ● | changes in pricing and availability of products and services; |
| ● | uncertainties regarding the financial results of equity method investees and changes in the nature of key strategic relationships with partners and Distributors; |
| ● | changes in domestic and foreign laws or regulations under which we operate; |
| ● | changes in laws or treaties relating to taxation, or the interpretation thereof, in the U.S. or in the countries in which we operate; |
| ● | the ability of suppliers and vendors to deliver products and services; |
| ● | our ability to timely and fully recover proceeds under our insurance policies; |
| ● | fluctuations in foreign currency exchange rates and political unrest and regulatory changes in the international markets in which we operate; |
| ● | changes in the size of the U.S. Hispanic population, including the impact of federal and state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating from Latin America; |
| ● | changes in, or failure or inability to comply with, government regulations including, without limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings; and |
| ● | competitor responses to our products and services. |
The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All subsequent written and oral forward-looking statements concerning the matters addressed in this Quarterly Report and attributable to us or any person acting on our behalf are qualified by these cautionary statements.
The forward-looking statements are based on current expectations about future events and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations may not be achieved. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
5
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share and par value amounts)
| June 30, |
| December 31, | |||
2022 | 2021 | |||||
| (unaudited) |
| ||||
Assets | ||||||
Current Assets | ||||||
Cash | $ | 28,894 | $ | 49,477 | ||
Accounts receivable, net of allowance for doubtful accounts of $776 and $771, respectively |
| 27,078 |
| 33,738 | ||
Due from related parties |
| 701 |
| 925 | ||
Programming rights |
| 8,620 |
| 10,938 | ||
Prepaid expenses |
| 6,537 |
| 7,767 | ||
Other current assets | 2,270 | 23,519 | ||||
Current assets held for sale | 41,512 | — | ||||
Total current assets |
| 115,612 |
| 126,364 | ||
Programming rights, net of current portion |
| 13,528 |
| 20,955 | ||
Property and equipment, net |
| 30,286 |
| 31,554 | ||
Operating lease right-of-use assets | 1,027 | 1,281 | ||||
Broadcast license |
| 41,356 |
| 41,356 | ||
Goodwill |
| 165,597 |
| 231,710 | ||
Other intangibles, net |
| 17,319 |
| 115,110 | ||
Deferred income taxes | 3,928 | — | ||||
Equity method investments | 21,938 | 24,171 | ||||
Other assets | 4,677 | 7,410 | ||||
Noncurrent assets held for sale | 175,255 | — | ||||
Total Assets | $ | 590,523 | $ | 599,911 | ||
Liabilities and Stockholders’ Equity | ||||||
Current Liabilities | ||||||
Accounts payable | 2,557 | 11,533 | ||||
Due to related parties |
| 998 |
| 1,383 | ||
Accrued agency commissions |
| 6,901 |
| 7,729 | ||
Accrued compensation and benefits |
| 5,120 |
| 7,031 | ||
Accrued marketing | 9,105 | 10,526 | ||||
Other accrued expenses |
| 16,216 |
| 10,418 | ||
Deferred revenue | 655 | 7,400 | ||||
Programming rights payable |
| 5,486 |
| 13,242 | ||
Income taxes payable | 424 | 1,353 | ||||
Current portion of long-term debt |
| 2,656 |
| 2,656 | ||
Current liabilities held for sale | 28,930 | — | ||||
Total current liabilities |
| 79,048 |
| 73,271 | ||
Programming rights payable, net of current portion |
| 97 |
| 2,820 | ||
Long-term debt, net of current portion |
| 246,231 |
| 246,919 | ||
Deferred income taxes |
| 20,682 |
| 22,427 | ||
Defined benefit pension obligation |
| 2,985 |
| 2,895 | ||
Other long-term liabilities | 587 | 2,031 | ||||
Noncurrent liabilities held for sale | 6,017 | — | ||||
Total Liabilities |
| 355,647 |
| 350,363 | ||
Stockholders’ Equity | ||||||
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued at June 30, 2022 and December 31, 2021 |
|
| ||||
Class A common stock, $.0001 par value; 100,000,000 shares authorized; 26,328,741 and 25,999,998 shares issued at June 30, 2022 and December 31, 2021, respectively |
| 3 |
| 3 | ||
Class B common stock, $.0001 par value; 33,000,000 shares authorized; 19,720,381 shares issued at June 30, 2022 and December 31, 2021 |
| 2 |
| 2 | ||
Additional paid-in capital |
| 290,900 |
| 288,703 | ||
Class A treasury stock, at cost; 6,012,599 shares and 6,003,139 shares at June 30, 2022 and December 31, 2021, respectively |
| (64,847) |
| (64,780) | ||
Retained earnings |
| 9,213 |
| 26,352 | ||
Accumulated other comprehensive loss |
| (395) |
| (732) | ||
Total Stockholders’ Equity |
| 234,876 |
| 249,548 | ||
Total Liabilities and Stockholders’ Equity | $ | 590,523 | $ | 599,911 | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net revenues |
| $ | 54,174 | $ | 50,460 | $ | 102,973 | $ | 88,037 | |||
Operating expenses: |
| |||||||||||
Cost of revenues |
| 18,348 |
| 14,798 |
| 33,473 |
| 26,577 | ||||
Selling, general and administrative |
| 25,911 |
| 24,908 |
| 56,569 |
| 36,299 | ||||
Depreciation and amortization |
| 3,335 |
| 4,337 |
| 10,964 |
| 7,002 | ||||
Other expenses |
| 8,939 |
| 1,363 |
| 10,057 |
| 8,091 | ||||
Gain from FCC spectrum repack and other |
| (95) |
| (2,124) |
| (141) |
| (2,176) | ||||
Total operating expenses |
| 56,438 |
| 43,282 |
| 110,922 |
| 75,793 | ||||
Operating (loss) income |
| (2,264) |
| 7,178 |
| (7,949) |
| 12,244 | ||||
Other (expense) income: |
| |||||||||||
Interest expense and other, net |
| (3,111) |
| (3,165) |
| (6,275) |
| (5,523) | ||||
Gain (loss) on equity method investment activity |
| 2,283 |
| (8,569) |
| (2,489) |
| 24,040 | ||||
Other expense, net | — | — | — | (668) | ||||||||
Total other (expense) income |
| (828) |
| (11,734) |
| (8,764) |
| 17,849 | ||||
(Loss) income before income taxes |
| (3,092) |
| (4,556) |
| (16,713) |
| 30,093 | ||||
Income tax expense | (819) | (1,785) | (426) | (3,053) | ||||||||
Net (loss) income | (3,911) | (6,341) | (17,139) | 27,040 | ||||||||
Net loss attributable to non-controlling interest | — | 55 | — | 32 | ||||||||
Net (loss) income attributable to Hemisphere Media Group, Inc. | $ | (3,911) | $ | (6,286) | $ | (17,139) | $ | 27,072 | ||||
(Loss) income per share attributable to Hemisphere Media Group, Inc.: | ||||||||||||
Basic | $ | (0.10) | $ | (0.16) | $ | (0.43) | $ | 0.69 | ||||
Diluted | $ | (0.10) | $ | (0.16) | $ | (0.43) | $ | 0.68 | ||||
Weighted average shares outstanding: | ||||||||||||
Basic |
| 39,991 |
| 39,641 |
| 39,861 |
| 39,511 | ||||
Diluted |
| 39,991 |
| 39,641 |
| 39,861 |
| 39,900 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statement of Comprehensive (Loss) Income
(Unaudited)
(amounts in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net (loss) income | $ | (3,911) | $ | (6,341) | $ | (17,139) | $ | 27,040 | ||||
Other comprehensive income : | ||||||||||||
Change in fair value of interest rate swap, net of income taxes | — | 330 | 337 | 674 | ||||||||
Comprehensive (loss) income | (3,911) | (6,011) | (16,802) | 27,714 | ||||||||
Comprehensive loss attributable to non-controlling interest | — | 55 | — | 32 | ||||||||
Comprehensive (loss) income attributable to Hemisphere Media Group, Inc. | $ | (3,911) | $ | (5,956) | $ | (16,802) | $ | 27,746 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
8
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three and Six Months Ended June 30, 2022
(Unaudited)
(amounts in thousands)
Class A | Class B | Additional | Class A | Accumulated | |||||||||||||||||||||
Common Stock | Common Stock | Paid In | Treasury | Retained | Comprehensive | ||||||||||||||||||||
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Total | ||||||||
Balance at March 31,2022 |
| 26,080 | $ | 3 |
| 19,720 | $ | 2 | $ | 290,077 | $ | (64,831) | $ | 13,124 | $ | (395) | $ | 237,980 | |||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| (3,911) |
| — |
| (3,911) | |||||||
Vesting of restricted stock | 249 | 0 | — | — | — | (16) | — | — | (16) | ||||||||||||||||
Stock-based compensation |
| — |
| — |
| — |
| — |
| 823 |
| — |
| — |
| — |
| 823 | |||||||
Balance at June 30, 2022 |
| 26,329 | $ | 3 |
| 19,720 | $ | 2 | $ | 290,900 | $ | (64,847) | $ | 9,213 | $ | (395) | $ | 234,876 | |||||||
Class A |
| Class B |
| Additional |
| Class A |
|
| Accumulated |
| |||||||||||||||
Common Stock | Common Stock | Paid In | Treasury | Retained | Comprehensive | ||||||||||||||||||||
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Total | ||||||||
Balance at December 31, 2021 |
| 26,000 | $ | 3 |
| 19,720 | $ | 2 | $ | 288,703 | $ | (64,780) | $ | 26,352 | $ | (732) | $ | 249,548 | |||||||
Net loss |
| — | — | — | — | — | — | (17,139) | — | (17,139) | |||||||||||||||
Vesting of restricted stock |
| 329 | 0 |
| — |
| — |
| — |
| (67) |
| — |
| — |
| (67) | ||||||||
Stock-based compensation | — | — | — | — | 2,197 | — | — | — | 2,197 | ||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | 337 | 337 | ||||||||||||||||
Balance at June 30, 2022 |
| 26,329 | $ | 3 |
| 19,720 | $ | 2 | $ | 290,900 | $ | (64,847) | $ | 9,213 | $ | (395) | $ | 234,876 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
9
HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three and Six Months Ended June 30, 2021
(Unaudited)
(amounts in thousands)
Class A |
| Class B |
| Additional |
| Class A |
|
| Accumulated |
| Non- |
| ||||||||||||||||
Common Stock | Common Stock | Paid In | Treasury | Retained | Comprehensive | controlling | ||||||||||||||||||||||
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Interest |
| Total | |||||||||
Balance at March 31, 2021 |
| 25,712 | $ | 3 |
| 19,720 | $ | 2 | $ | 283,883 | $ | (63,904) | $ | 48,198 | $ | (1,843) | $ | 504 | $ | 266,843 | ||||||||
Net loss |
| — | — | — | — | — | — | (6,286) | — | (55) | (6,341) | |||||||||||||||||
Vesting of restricted stock | 276 | — | — | — | — | (815) | — | — | — | (815) | ||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,490 | — | — | — | — | 1,490 | ||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | 330 | — | 330 | ||||||||||||||||||
Balance at June 30, 2021 |
| 25,988 | $ | 3 |
| 19,720 | $ | 2 | $ | 285,373 | $ | (64,719) | $ | 41,912 | $ | (1,513) | $ | 449 | $ | 261,507 | ||||||||
Class A | Class B | Additional | Class A | Accumulated | Non- | |||||||||||||||||||||||
Common Stock | Common Stock | Paid In | Treasury | Retained | Comprehensive | controlling | ||||||||||||||||||||||
| Shares |
| Par Value |
| Shares |
| Par Value |
| Capital |
| Stock |
| Earnings |
| Loss |
| Interest |
| Total | |||||||||
Balance at December 31, 2020 |
| 25,458 | $ | 3 |
| 19,720 | $ | 2 | $ | 279,800 | $ | (61,453) | $ | 14,840 | $ | (2,187) | $ | 481 | $ | 231,486 | ||||||||
Net income (loss) |
| — | — | — | — | — | — | 27,072 | — | (32) | 27,040 | |||||||||||||||||
Vesting of restricted stock | 279 | — | — | — | — | (825) | — | — | — | (825) | ||||||||||||||||||
Issuance of Class A Common Stock | 238 | — | — | — | 2,778 | (1,077) | — | — | — | 1,701 | ||||||||||||||||||
Repurchases of Class A Common Stock | — | — | — | — | — | (1,321) | — | — | — | (1,321) | ||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,795 | — | — | — | — | 2,795 | ||||||||||||||||||
Exercise of stock options | 13 | — | — | — | (0) | (43) | — | — | — | (43) | ||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | 674 | — | 674 | ||||||||||||||||||
Balance at June 30, 2021 |
| 25,988 | $ | 3 |
| 19,720 | $ | 2 | $ | 285,373 | $ | (64,719) | $ | 41,912 | $ | (1,513) | $ | 449 | $ | 261,507 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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HEMISPHERE MEDIA GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Reconciliation of Net (loss) income to Net Cash Provided by Operating Activities: | ||||||
Net (loss) income | $ | (17,139) | $ | 27,040 | ||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
|
| ||||
Depreciation and amortization |
| 10,964 |
| 7,002 | ||
Programming amortization |
| 10,783 |
| 7,353 | ||
Amortization of deferred financing costs and original issue discount |
| 762 |
| 530 | ||
Stock-based compensation |
| 2,197 |
| 2,795 | ||
Provision for bad debts |
| 30 |
| 49 | ||
Gain from FCC spectrum repack and other | (141) | (2,176) | ||||
Deferred tax expense | (3,106) | — | ||||
Loss (gain) on equity method investment activity | 2,489 | (24,040) | ||||
Amortization of operating lease right-of-use assets | 344 | 276 | ||||
Other non-cash acquistion charges | — | 1,258 | ||||
Changes in assets and liabilities: | ||||||
Decrease (increase) in: | ||||||
Accounts receivable |
| 385 |
| 836 | ||
Due from related parties, net |
| (776) |
| 538 | ||
Programming rights |
| (22,010) |
| (12,102) | ||
Prepaids and other assets |
| (6,401) |
| (2,923) | ||
(Decrease) increase in: | ||||||
Accounts payable |
| (198) |
| 9,104 | ||
Other accrued expenses |
| 6,589 |
| 5,335 | ||
Programming rights payable |
| (1,111) |
| (3,884) | ||
Income taxes payable |
| (931) |
| 2,588 | ||
Other liabilities |
| 223 |
| 320 | ||
Net cash (used in) provided by operating activities |
| (17,047) |
| 19,899 | ||
Cash Flows From Investing Activities: | ||||||
Funding of equity method investments | (256) | (1,561) | ||||
Capital expenditures | (1,911) | (2,853) | ||||
FCC repack proceeds | 26 | 2,176 | ||||
Cash paid for acquisition of Pantaya | — | (122,621) | ||||
Net cash used in investing activities |
| (2,141) |
| (124,859) | ||
Cash Flows From Financing Activities: | ||||||
Purchases of common stock |
| (67) |
| (3,266) | ||
Repayments of long-term debt | (1,328) | (1,168) | ||||
Proceeds from incremental term loan |
| — |
| 48,000 | ||
Payment of financing fees | — | (638) | ||||
Net cash (used in) provided by financing activities | (1,395) | 42,928 | ||||
Net decrease in cash | (20,583) | (62,032) | ||||
Cash: | ||||||
Beginning | 49,477 | 134,471 | ||||
Ending | $ | 28,894 | $ | 72,439 | ||
Supplemental Disclosures of Cash Flow Information: | ||||||
Cash payments for: | ||||||
Interest | $ | 5,449 | $ | 5,073 | ||
Income taxes | $ | 4,077 | $ | 1,520 | ||
Non-cash investing activity (acquisition related): | ||||||
Issuance of Class A Common Stock | $ | — | $ | 2,188 | ||
Effective settlement of pre-existing receivables and payables, net | $ | — | $ | 1,499 | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements
Note 1. Nature of Business
Nature of business: The accompanying Condensed Consolidated Financial Statements include the accounts of Hemisphere Media Group, Inc. (“Hemisphere” or the “Company”), the parent holding company of Cine Latino, Inc. (“Cinelatino”), WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC) (“WAPA Holdings”), HMTV Cable, Inc. (“HMTV Cable”), the parent company of the entities for the networks consisting of Pasiones, TV Dominicana, and Centroamerica TV, HMTV Distribution, LLC (“HMTV Distribution”), the parent of Snap Global, LLC, and its wholly owned subsidiaries (“Snap Media”), and HMTV DTC, LLC (“HMTV DTC”), the parent company of Pantaya, LLC, and its subsidiaries (“Pantaya”), which we acquired on March 31, 2021 (see below). Hemisphere was formed on January 16, 2013 for purposes of effecting its initial public offering, which was consummated on April 4, 2013. In these notes, the terms “Company,” “we,” “us” or “our” mean Hemisphere and all subsidiaries included in our Condensed Consolidated Financial Statements.
Prior to March 31, 2021, the Company owned a 25% equity interest in Pantaya, the Spanish language streaming platform, which was accounted for as an equity method investment. On March 31, 2021 (“Acquisition Date”), the Company acquired the remaining 75% equity interest in Pantaya, for a cash purchase price of $123.6 million. As a result of the acquisition, Pantaya is now a wholly owned consolidated subsidiary. The Company accounted for the acquisition of the 75% equity interest of Pantaya as a step acquisition, which required remeasurement of the Company’s existing 25% ownership in Pantaya to fair value prior to completing the acquisition method of accounting. Using step acquisition accounting, the Company increased the value of its existing equity interest to fair value resulting in the recognition of a non-cash gain of $30.1 million, which was included in (loss) gain on equity method investment activity in the accompanying Condensed Consolidated Statement of Operations for the three months ended March 31, 2021.
On May 9, 2022, the Company entered into a definitive agreement to be acquired for $7.00 per share in cash by a subsidiary of Gato Investments LP (“Gato”), a portfolio investment of Searchlight Capital Partners, L.P. Upon completion of the transaction, Hemisphere will become a private company wholly owned by Gato. Concurrently, on May 9, 2022, the Company entered into an agreement to sell Pantaya to TelevisaUnivision, Inc. (“TelevisaUnivision”) in exchange for $115 million in cash plus TelevisaUnivision’s Puerto Rican radio business, subject to certain adjustments. Each transaction is subject to customary closing conditions, including the Gato transaction being subject the completion of the Pantaya transaction. The prior description is subject to, and is qualified in its entirety by reference to, that certain Agreement and Plan of Merger, dated as of May 9, 2022, by and among the Company, Hemisphere Media Holdings, LLC (“Hemisphere Holdings”), HWK Parent, LLC, HWK Merger Sub 1, Inc., and HWK Merger Sub 2, LLC, that certain Voting and Support Agreement, dated as of May 9, 2022, by and among the Company and certain stockholders of the Companies that are signatories thereto, that certain Membership Interest Purchase Agreement, dated as of May 9, 2022, by and among Univision Puerto Rico Station Operating Company (“Univision”), HMTV DTC, Pantaya and Hemisphere Holdings, and that certain Share Purchase Agreement, dated as of May 9, 2022, by and among HMTV DTC, Univision of Puerto Rico, Inc., Univision and TelevisaUnivision (collectively, the “Transaction Agreements”).
Reclassification: Certain prior year amounts on the presented Consolidated Balance Sheets and Consolidated Statement of Cash Flows have been reclassified to conform with current period presentation.
Basis of presentation: The accompanying Condensed Consolidated Financial Statements for Hemisphere and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Our financial condition as of, and operating results, for the three and six months ended June 30, 2022 are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2022. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Net (loss) income per common share: Basic (loss) income per share is computed by dividing (loss) income attributable to Hemisphere Media Group, Inc. common stockholders by the number of weighted-average outstanding shares of common stock. Diluted loss per share reflects the effect of the assumed exercise of stock options and vesting of restricted shares only in the periods in which such effect would have been dilutive.
The following table sets forth the computation of the common shares outstanding used in determining basic and diluted (loss) income per share attributable to Hemisphere Media Group, Inc. (amounts in thousands, except per share amounts):
We apply the treasury stock method to measure the dilutive effect of our outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted loss per common share calculation. Per the Accounting Standards Codification (“ASC”) 260, under the treasury stock method, the incremental shares (difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted income per share computation (ASC 260-10-45-23). The assumed exercise only occurs when the options are “In the Money” (exercise price is lower than the average market price for the period). If the options are “Out of the Money” (exercise price is higher than the average market price for the period), the exercise is not assumed since the result would be anti-dilutive. Potentially dilutive securities representing 4.1 and 1.6 million shares of common stock for the three months ended June 30, 2022 and 2021, respectively, were excluded from the computation of diluted (loss) income per common share for this period because their effect would have been anti-dilutive. Potentially dilutive securities representing 4.1 million and 2.1 million shares of common stock for the six months ended June 30, 2022 and 2021, respectively, were excluded from the computation of diluted (loss) income per common share for these periods because their effects would have been anti-dilutive. The net (loss) income per share attributable to Hemisphere Media Group, Inc. amounts are the same for our Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
As a result of the net loss for the three months ended June 30, 2022 and 2021, outstanding awards totaling 0.1 million and 0.4 million, respectively, were not included in the computation of diluted loss per share because their effect was anti-dilutive. As a result of the net loss for the six months ended June 30, 2022, 0.1 million outstanding awards were not included in the computation of diluted loss per share because their effect was anti-dilutive.
Held for sale: In accordance with ASC 360, the sale of Pantaya qualified as assets and liabilities held for sale as: (i) the Company has committed to a plan to sell, (ii) the disposal entities are available for immediate sale, (iii) the buyer has been identified and has committed to purchase, subject to satisfaction of certain closing conditions, and (iv) it is probable to occur within 1 year from the date of the classification. Assets and liabilities held for sale are measured at the lower of carrying amount and the fair value less cost to sell. Intangible assets and fixed assets are not amortized or depreciated once classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current and non-current items in the Condensed Consolidated Balance Sheets.
Use of estimates: In preparing these financial statements, management had to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the balance sheet dates, and the reported revenues and expenses for each of the three and six months ended June 30, 2022 and 2021. Such estimates are based on
13
historical experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates.
Accounting guidance not yet adopted: In March 2020, the FASB issued ASU 2020-04-Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides optional expedients and exceptions for applying U.S. GAAP principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective beginning on March 12, 2020, and can be adopted on a prospective basis no later than December 31, 2022. We are currently evaluating the impact, if any, that the updated accounting guidance will have on our Condensed Consolidated Financial Statements.
Note 2. Revenue Recognition
The following is a description of principal activities from which we generate our revenue:
Subscriber revenue: We enter into arrangements with multi-channel video Distributors, such as cable, satellite and telecommunications companies (referred to as “MVPDs”) and non-facilities based distributors also known as virtual multi-channel video distributors (referred to as “VMVPDs”) to provide a continuous feed of our Networks generally based on a per subscriber fee pursuant to multi-year contracts, referred to as “affiliation agreements”, which typically provide for annual rate increases. We have used the practical expedient related to the right to invoice and recognize revenue at the amount to which we have the right to invoice for services performed. The specific subscriber revenue we earn varies from period to period, Distributor to Distributor, and also varies among our Networks, but is generally based upon the number of each Distributor’s paying subscribers who subscribe to our Networks. Changes in subscriber revenue are primarily derived from changes in contractual per subscriber rates charged for our Networks and changes in the number of subscribers. Distributors report their subscriber numbers to our Networks generally on a two month lag. We record revenue based on estimates of the number of subscribers utilizing the most recently received remittance reporting of each MVPD, which is consistent with our past practice and industry practice. Revenue is recognized on a month by month basis when the performance obligations to provide service to the Distributors is satisfied. Payment is typically due and received within sixty days of the remittance. We also generate subscriber revenue from subscriptions to Pantaya, our streaming platform. Pantaya is available directly to consumers through our web application as well as through distribution partners. Certain distribution partners charge a fee, which is recorded in cost of revenues. Subscribers are billed at the start of their monthly or annual membership and revenue is recognized ratably over each applicable membership period. Subscriber revenue varies from period to period and is generally based upon the number of paying subscribers to our service. Estimates of revenue generated but not yet reported by the Company’s third party Distributors are made based on the estimated number of subscribers using the most recently received remittance reporting from each Distributor, which is consistent with our past practice and industry practice.
Advertising revenue: Advertising revenue is generated from the sale of commercial time, which is typically sold pursuant to sale orders with advertisers providing for an agreed upon commitment and price per spot. We recognize revenue from the sale of advertising as performance obligations are satisfied upon airing of the advertising; therefore, revenue is recognized at a point in time when each advertising spot is transmitted. Advertising agency fees are calculated based on a stated percentage applied to the gross billing revenue for our advertising inventory and are reported as a reduction of advertising revenue. Payment is typically due and received within thirty days of the invoice date.
Other revenue: Other revenues are derived primarily through the licensing of content to third parties including advertising video on demand (“AVOD”) platforms. We enter into agreements to license content and recognize revenue when the performance obligation is satisfied and control is transferred, which is generally upon delivery of the content.
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The following table presents the revenues disaggregated by revenue source (amounts in thousands):
Three months ended June 30, | ||||||
Revenues by type |
| 2022 |
| 2021 | ||
Subscriber revenue |
| $ | 31,979 | $ | 32,218 | |
Advertising revenue |
| 17,088 |
| 17,269 | ||
Other revenue |
| 5,107 |
| 973 | ||
Total revenue |
| $ | 54,174 | $ | 50,460 | |
Six months ended June 30, | ||||||
Revenues by type |
| 2022 |
| 2021 | ||
Subscriber revenue | $ | 64,188 | $ | 52,167 | ||
Advertising revenue |
| 33,058 |
| 33,175 | ||
Other revenue |
| 5,727 |
| 2,695 | ||
Total revenue | $ | 102,973 | $ | 88,037 | ||
Deferred Revenue: As of June 30, 2022 and December 31, 2021, the Company had deferred revenue of $0.7 million and $7.4 million, respectively. For the three and six months ended June 30, 2022, the Company recognized $0.2 and $3.0 million of revenue that was included in the deferred revenue balance as of December 31, 2021, respectively. The decrease in deferred revenue from December 31, 2021 to June 30, 2022 was also due to the Held for Sale classification of Pantaya’s assets and liabilities. For more information, see Note 4, “Held for Sale” of Notes to Condensed Consolidated Financial Statements.
Note 3. Related Party Transactions
The Company has various agreements with MVS, a Mexican media and television conglomerate, which has directors and stockholders in common with the Company as follows:
| ● | MVS provides Cinelatino with satellite and support services including origination, uplinking and satellite delivery of two feeds of Cinelatino’s channel (for U.S. and Latin America), master control and monitoring, dubbing, subtitling and closed captioning, and other support services. Expenses incurred under this agreement are included in cost of revenues in the accompanying Condensed Consolidated Statements of Operations. Total expenses incurred were $0.5 million and $0.7 million for the three months ended June 30, 2022 and 2021, respectively. Total expenses incurred were $1.1 million and $1.3 million for the six months ended June 30, 2022 and 2021, respectively. Amounts due to MVS pursuant to the agreements noted above amounted to $1.0 million and $0.4 million as of June 30, 2022 and December 31, 2021, respectively. |
| ● | Dish Mexico (d/b/a Comercializadora de Frecuencias Satelitales, S. de R.L. de C.V.) is an MVS affiliate and operates a subscription satellite television service throughout Mexico, and in connection with the services distributes Cinelatino. Total revenue recognized was $0.2 million for each of the three months ended June 30, 2022 and 2021. Total revenue recognized was $0.4 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively. Amounts due from Dish Mexico amounted to $0.4 million and $0.1 million as of June 30, 2022 and December 31, 2021, respectively. |
| ● | MVS has the non-exclusive right to duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in Mexico. Cinelatino receives revenues net of MVS’s distribution fee, which is equal to 13.5% of all license fees collected from third party distributors managed but not owned by MVS. Total revenues recognized was $0.2 million for each of the three months ended June 30, 2022 and 2021. Total revenues recognized were $0.3 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively. Amounts due from MVS pursuant to the agreements noted above amounted to $0.3 million and $0.0 million as of June 30, 2022 and December 31, 2021, respectively. |
15
The Company has various agreements with TelevisaUnivision (including its various divisions and affiliates), which has directors in common with the Company (who may hold a material financial interest in TelevisaUnivision).
| ● | Pantaya has an agreement for the purchase of advertising on TelevisaUnivision’s television and radio properties. Expenses under this agreement are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statement of Operations. Total expenses incurred were $0 million for each of the three and six months ended June 30, 2022. Total expenses incurred were $0.5 million for each of the three and six months ended June 30, 2021. Amounts due to TelevisaUnivision pursuant to this agreement totaled $0 million and $0.1 million as of June 30, 2022 and December 31, 2021, respectively. The Company had remaining commitments of $4.0 million as of June 30, 2022 which is included in Note 14, “Commitments” of Notes to Condensed Consolidated Financial Statements. |
| ● | Pantaya has various content output agreements with Videocine, S.A. de C.V. (“Videocine”), a division of TelevisaUnivision pursuant to which Pantaya licenses content from Videocine or licenses content to Videocine. There were no revenues earned or expenses incurred under these agreements for the three and six months ended June 30, 2022 and 2021. Deferred revenue related to the agreements was $2.5 million as of June 30, 2022 and December 31, 2021. Amounts due from Videocine pursuant to the agreements noted above amounted to $0.2 million and $0.6 million as of June 30, 2022 and December 31, 2021, respectively. Amounts due to Videocine pursuant to the agreements noted above amounted to $1.3 million and $0.9 million as of June 30, 2022 and December 31, 2021, respectively. For more information, see Note 4, “Held for Sale” of Notes to Condensed Consolidated Financial Statements. |
| ● | The Company has various licensing agreements with TelevisaUnivision pursuant to which the Company licenses content from TelevisaUnivision or licenses content to TelevisaUnivision. Total revenues recognized were $0.0 million for each of the three months ended June 30, 2022 and 2021. TelevisaUnivision. Total revenues recognized were $0.1 million for each of the six months ended June 30, 2022 and 2021. Total expenses incurred were $0.0 million for each of the three months ended June 30, 2022 and 2021. Total expenses incurred were $0.1 million for each of the six months ended June 30, 2022 and 2021. Amounts due from TelevisaUnivision pursuant to the agreements noted above amounted to $1.8 million and $0 million as of June 30, 2022 and December 31, 2021, respectively. No amounts were due to TelevisaUnivision as of June 30, 2022 and December 31, 2021. |
The Company entered into an amended and restated consulting agreement with James M. McNamara, a member of the Company’s board of directors, on August 13, 2019, to provide the development, production and maintenance of programming, affiliate relations, identification and negotiation of carriage opportunities, and the development, identification and negotiation of new business initiatives including sponsorship, new channels, direct-to-consumer programs and other interactive initiatives. Total expenses incurred under this agreement are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations and amounted to $0.1 million for each of the three months ended June 30, 2022 and 2021, and $0.2 million for each of the six months ended June 30, 2022 and 2021. No amounts were due to this related party as of June 30, 2022 and December 31, 2021.
Note 4. Held for Sale
On May 9, 2022, the Company entered into an agreement to sell Pantaya to TelevisaUnivision in exchange for $115 million in cash plus TelevisaUnivision’s Puerto Rican radio business, subject to certain adjustments. The sale of Pantaya is expected to close in the third quarter of 2022. The Company determined that Pantaya met the held for sale criteria as of May 9, 2022 and, as a result, related assets and liabilities were classified as held for sale in the Condensed Consolidated Balance Sheets as of June 30, 2022. As part of classifying Pantaya as held for sale in accordance with U.S. GAAP, the Company is required to measure Pantaya at the lower of its carrying amount or fair value less cost to sell. As of June 30, 2022, the Company determined there was no impairment and will reassess at the close of the transaction. The prior description is subject to, and is qualified in its entirety by reference to, the terms of the Transaction Agreements.
16
The following table summarizes the Company’s assets and liabilities held for sale by major class (amounts in thousands):
Pantaya had a pre-tax loss of $7.0 million and $4.9 million for the three months ended June 30, 2022 and 2021, respectively, and $21.1 million and $4.9 million for the six months ended June 30, 2022 and 2021, respectively.
Note 5. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following as of June 30, 2022 and December 31, 2021 (amounts in thousands):
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
Broadcast license | $ | 41,356 | $ | 41,356 | ||
Goodwill |
| 165,597 |
| 231,710 | ||
Other intangibles |
| 17,319 |
| 115,110 | ||
Total intangible assets | $ | 224,272 | $ | 388,176 | ||
A summary of changes in the Company’s goodwill and other indefinite-lived intangible assets, on a net basis, for the six months ended June 30, 2022 is as follows (amounts in thousands):
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A summary of the changes in the Company’s other amortizable intangible assets for the six months ended June 30,2022 is as follows (amounts in thousands):
The aggregate amortization expense of the Company’s amortizable intangible assets was $2.1 million and $3.2 million for the three months ended June 30, 2022 and 2021, respectively, and $8.5 million and $4.8 million for the six months ended June 30, 2022 and 2021, respectively. The weighted average remaining amortization period is 3.1 years at June 30, 2022.
Future estimated amortization expense is as follows (amounts in thousands):
Year Ending December 31, |
| Amount | |
Remainder of 2022 | $ | 100 | |
2023 |
| 199 | |
2024 |
| 199 | |
2025 | 135 | ||
2026 and thereafter |
| — | |
Total | $ | 633 | |
Note 6. Equity Method Investments
The Company makes investments that support its underlying business strategy and enables it to enter new markets. The Company holds equity investments in Canal 1 and Snap JV (in each case, as defined and discussed below), which are variable interest entities (“VIEs”), for which the Company is not the primary beneficiary. The primary beneficiary is the party involved with the VIE that (i) has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The activities of each VIE that most significantly impact the VIE’s economic performance are controlled by the VIE’s board of directors and the Company’s representation on the board of directors of each VIE is commensurate with its voting equity interest. As the Company does not hold a majority voting interest or disproportionate voting or other rights, it does not have the power to direct the activities that most significantly impact the economic performance of any of these VIEs.
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On November 30, 2016, we, in partnership with Colombian content producers, Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.S. and NTC Nacional de Television y Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license for Canal 1 in Colombia. The partnership began operating Canal 1 on May 1, 2017. On February 7, 2018, Colombian regulatory authorities approved an increase in our ownership in the joint venture from 20% to 40%. In July 2019, the Colombian government enacted legislation resulting in the extension of the concession license for Canal 1 for an additional ten years for no additional consideration. The concession is now due to expire on April 30, 2037 and is renewable for an additional 20-year period. The joint venture is deemed a VIE that is accounted for under the equity method. As of June 30, 2022, we have funded $126.6 million in capital contributions to Canal 1. The Canal 1 joint venture losses-to-date have exceeded the capital contributions of the common equity partners and in accordance with equity method accounting, losses in excess of the common equity have been recorded against the next layer of the capital structure, in this case, preferred equity. The Company is currently the sole preferred equity holder in Canal 1 and therefore, the Company has recorded nearly 100% of the losses of the joint venture. We record the income or loss on investment on a one quarter lag. For three months ended June 30, 2022 and 2021, we recorded $2.3 million gain on equity method investment and $8.6 million loss from equity method investment in the accompanying Condensed Consolidated Statements of Operations, respectively. For the six months ended June 30, 2022 and 2021, we recorded $2.5 million loss on equity method investment and $6.1 million loss from equity method investment activity in the accompanying Condensed Consolidated Statements of Operations, respectively. The net balance recorded in equity method investments in the accompanying Condensed Consolidated Balance Sheets related to Canal 1 was $22.0 million and $24.2 million at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022 and December 31, 2021 we had a receivable balance of $2.6 million, which is included in other assets in the accompanying Condensed Consolidated Balance Sheets.
On April 28, 2017, we acquired a 25.5% interest in REMEZCLA, a digital media company targeting English speaking and bilingual U.S. Hispanic millennials through innovative content, for $5.0 million. At March 31, 2020, given the negative impacts caused by the COVID-19 pandemic and the associated liquidity and going-concern uncertainties related to REMEZCLA, the Company determined that the investment in REMEZCLA was other-than-temporarily impaired and recorded a non-cash impairment charge of $5.5 million reflecting the write-off of the full carrying amount of our investment. Due to the write-off of the investment carrying value, we did not record any share of the loss from the investment for the three and six months ended June 30, 2022 and 2021. The net balance recorded in equity method investments in the accompanying Condensed Consolidated Balance Sheets was $0 million as of June 30, 2022 and December 31, 2021. For more information, see Note 15, "Subsequent Events" of Notes to Condensed Consolidated Financial Statements.
On November 26, 2018, Snap Media acquired a 50% interest in Snap JV, LLC (“Snap JV”) (as of July 15, 2021, the Company owns 100% of Snap Media), a newly formed joint venture with Mar Vista Entertainment, LLC (“MarVista”), to co-produce original movies and series. The investment is deemed a VIE that is accounted for under the equity method. As of June 30, 2022, we have funded $0.4 million into Snap JV. We record the income or loss on investment on a one quarter lag. For the three months ended June 30, 2022 and 2021, we have recorded $0.0 million and $0 million, respectively, in loss on equity method investments in the accompanying Condensed Consolidated Statements of Operations. For the six months ended June 30, 2022 and 2021, we recorded $0.0 million and $0 million, respectively, in loss on equity method investments in the accompanying Condensed Consolidated Statements of Operations. The net balance recorded in equity method investments related to Snap JV was $0.0 million as of June 30, 2022 and December 31, 2021, and is included in equity method investments in the accompanying Condensed Consolidated Balance Sheets.
The Company records the income or loss on investments on a one quarter lag. Summary unaudited financial data for our equity method investments in the aggregate as of and for the three months ended March 31, 2022, are included below (amounts in thousands):
| Total Equity Investees | ||
Current assets | $ | 12,434 | |
Non-current assets | $ | 22,804 | |
Current liabilities | $ | 8,572 | |
Non-current liabilities | $ | 80,604 | |
Net revenue | $ | 5,334 | |
Operating loss | $ | (4,451) | |
Net loss | $ | (14,410) | |
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Note 7. Income Taxes
The 2017 Tax Cuts and Jobs Act (“Jobs Act”) was enacted on December 22, 2017. The Jobs Act revised the U.S. corporate income tax by lowering the statutory corporate tax rate from 35% to 21% in 2018. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal corporate tax rate reduces the likelihood of our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance. Additionally, the Company evaluated the potential interest limitation established under the tax act and determined that it would affect the 2022 provision for income taxes.
The Company has historically calculated the provision for income taxes during interim periods by applying an estimated annual effective tax rate for the full fiscal year to income (loss) before income taxes for the reporting period. Since the Company determined that relatively small changes in estimated annual income (loss) before income taxes could result in significant changes in the estimated annual effective tax rate, the Company has calculated the income tax provision using a discrete rate of 8.1% based on the actual income before income taxes for the six months ended June 30, 2022, for all jurisdictions, except for Puerto Rico, as permitted under ASC 740-270-30-36,”Income Taxes - Interim Reporting”. The difference between the discrete rate of 8.1% and the statutory Federal income tax rate of 21% in the six months ended June 30, 2022, is primarily due to permanent items, foreign tax credit limitation, and limitations on the deductibility of executive compensation under Internal Revenue Code Section 162(m). The losses at Canal 1 are excluded from the provision expense since these losses create a deferred tax asset, and due to the uncertainty of the realizability, the Company has recorded a full valuation allowance. The Puerto Rico jurisdiction continues to be computed utilizing an estimated annual effective rate of 25.5%. The difference between the Puerto Rico tax rate of 37.5% and the estimated annual effective rate of 25.5%, is primarily due to a reduced income tax rate in Puerto Rico on specific revenue related to local programming.
For the six months ended June 30, 2021, our income tax expense has been computed utilizing an estimated annual effective tax rate of 46.7%, respectively. The difference between the annual effective rate of 46.7% and the statutory Federal income tax rate of 21% in the six month period ended June 30, 2021, is primarily due to the impact of the Tax Act, which impacted the valuation allowance on foreign tax credits, and limitations on the deductibility of executive compensation under Internal Revenue Code Section 162(m). The annual effective tax rate related to income generated in the U.S. is 31.8%. Due to the reduced U.S. tax rate, the Company determined that a portion of its foreign income, which is taxed at a higher rate, will result in the generation of excess foreign tax credits that will not be available to offset U.S. income tax. As a result, 14.9% of the annual effective rate relates to the required valuation allowance against the excess foreign tax credits, bringing the annual effective tax rate for the six month period ended June 30, 2021 to 46.7%. Additionally, the gain related to the step acquisition of Pantaya of $30.1 million was determined to be significant and infrequent, and as a result, this item has not been included in the annual effective tax rate.
Income tax expense was $0.8 million and $1.8 million for the three months ended June 30, 2022 and 2021, respectively. Income tax expense was $0.4 million and $3.1 million for the six months ended June 30, 2022 and 2021, respectively.
Note 8. Long-Term Debt
Long-term debt as of June 30, 2022 and December 31, 2021 consists of the following (amounts in thousands):
| June 30, 2022 |
| December 31, 2021 | |||
Senior Notes due February 2024 | $ | 248,887 | $ | 249,575 | ||
Less: Current portion |
| 2,656 |
| 2,656 | ||
$ | 246,231 | $ | 246,919 | |||
On February 14, 2017, Hemisphere Media Holdings, LLC (“Holdings”) and InterMedia Español, Inc. (together with Holdings, the “Borrowers”), both wholly owned, indirect subsidiaries of the Company, amended the Term Loan Facility (the “Second Amended Term Loan Facility”). The Second Amended Term Loan Facility provides for a $213.3 million senior secured term loan B facility, and matures on February 14, 2024. The Second Amended Term Loan Facility bore interest at the Borrowers’ option of either (i) London Inter-bank Offered Rate (“LIBOR”) plus a margin of 3.50% or (ii) an Alternate Base Rate (“ABR”) plus a margin of 2.50%.
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On March 31, 2021 (the “Closing Date”), the Borrowers amended the Term Loan Facility, as previously amended (the “Third Amended Term Loan Facility”), for the borrowing of a new tranche of term loans in the aggregate principal amount of $50.0 million and matures on February 14, 2024. The Third Amended Term Loan Facility bears interest at the Borrowers’ option of either (i) LIBOR plus a margin of 3.50% or (ii) an ABR plus a margin of 2.50%. There is no LIBOR floor. The add-on to the term loan B facility was issued with 4.0% of original issue discount (“OID”).
Additionally, the Third Amended Term Loan Facility provides for a revolving loan (the “Revolving Facility”) allowing for an aggregate principal amount of up to $30.0 million. The Revolving Facility is secured on a pari passu basis by the collateral securing the Third Amended Term Loan Facility and will mature on November 15, 2023. The Revolving Facility bears interest at the Borrowers’ option of either (i) LIBOR (which will not be less than zero) plus a margin of 2.75% or (ii) or an ABR plus a margin of 1.75%, in each case, with a 25 basis points (“bps”) step-up at a First Lien Net Leverage Ratio level of 3.50:1.00 and 25 bps step-downs at a First Lien Net Leverage Ratio level of 2.50:1.00 and 1.50:1.00. The First Lien Net Leverage Ratio limits the amount of cash netted against debt to a maximum amount of $60.0 million. The Borrowers are also required to pay a quarterly commitment fee on the undrawn balance of the Revolving Facility at 37.5 bps per annum. As of June 30, 2022, the Revolving Facility was undrawn.
The Third Amended Term Loan Facility does not have any maintenance covenants. The Revolving Facility will have a springing First Lien Net Leverage Ratio of no greater than 5.00:1.00, tested commencing with the last day of the fiscal quarter ending June 30, 2021, and the last day of each fiscal quarter thereafter, solely to the extent that on such day, the aggregate amount of revolving loans and letter of credit exposure (excluding up to $5.0 million of undrawn letters of credit and cash collateralized or backstopped letters of credit) exceeds 35% of the aggregate commitments under the Revolving Facility.
The Third Amended Term Loan Facility requires the Borrowers to make amortization payments (in quarterly installments) equal to 1.00% per annum with respect to the Third Amended Term Loan Facility with any remaining amount due at final maturity. The Third Amended Term Loan Facility principal payments commenced on June 30, 2021, with a final installment due on February 14, 2024. Voluntary prepayments are permitted, in whole or in part, subject to certain minimum prepayment requirements.
Within 90 days after the end of each fiscal year, the Borrowers are required to make a prepayment of the loan principal in an amount equal to a percentage of the excess cash flow of the most recently completed fiscal year. Excess cash flow is generally defined as net income plus depreciation and amortization expense, less mandatory prepayments of the term loan, income taxes and capital expenditures, and adjusted for the change in working capital. The percentage of the excess cash flow used to determine the amount of the prepayment of the loan declines from 50% to 25%, and again to 0% at lower leverage ratios. Pursuant to the terms of the Third Amended Term Loan Facility, no excess cash flow payment was due in March 2022.
In accordance with ASC 470 – Debt, the Incremental Facility borrowing was deemed a modification of the Second Term Loan Facility and as such, an additional $2.0 million of original issue discount (“OID”) incurred in connection with the Third Amended Term Loan Facility was added to the existing OID.As of June 30,2022, the OID balance was $1.7 million, net of accumulated amortization of $3.8 million and was recorded as a reduction to the principal amount of the long-term debt outstanding as presented on the accompanying Condensed Consolidated Balance Sheets and will be amortized as a component of interest expense over the term of the Third Amended Term Loan Facility. Financing costs of $0.6 million incurred in connection with the Third Amended Term Loan Facility were expensed in accordance with ASC 470 – Debt and are included in other expenses in the accompanying Condensed Consolidated Statement of Operations at March 31, 2021. In accordance with ASU 2015-15 Interest—Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, deferred financing fees of $0.4 million, net of accumulated amortization of $2.9 million, are presented as a reduction to the Third Amended Term Loan Facility outstanding at June 30, 2022 as presented on the accompanying Condensed Consolidated Balance Sheets, and will be amortized as a component of interest expense over the term of the Third Amended Term Loan Facility. An additional $0.6 million of deferred costs incurred on the Revolving Facility, in connection with the Third Amended Term Loan Facility, was recorded to prepaid and other current assets and other non-current assets in the accompanying Condensed Consolidated Balance Sheets and will be amortized on a straight-line basis through maturity on November 15, 2023. As of June 30, 2022, deferred costs for the Revolving Facility were $0.3 million, net of accumulated amortization of $0.3 million.
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The carrying value of the long-term debt approximates fair value at June 30, 2022 and December 31, 2021, and was derived from quoted market prices by independent dealers (Level 2 in the fair value hierarchy under ASC 820, Fair Value Measurements and Disclosures). The following are the maturities of our long-term debt as of June 30,2022 (amounts in thousands):
Year Ending December 31, |
| Amount | |
Remainder of 2022 | $ | 1,328 | |
2023 |
| 2,656 | |
2024 |
| 246,976 | |
Total | $ | 250,960 | |
Note 9. Derivative Instruments
We use derivative financial instruments in the management of our interest rate exposure. Our strategy is to eliminate the cash flow risk on a portion of the variable rate debt caused by changes in the designated benchmark interest rate, LIBOR. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
On May 4, 2017, we entered into two identical pay-fixed, receive-variable, interest rate swaps with two different counterparties, to hedge the variability in the LIBOR interest payments on an aggregate notional value of $100.0 million of our Senior Notes, through the expiration of the swaps on March 31, 2022. At inception, these interest rate swaps were designated as cash flow hedges of interest rate risk, and as such, the unrealized changes in fair value are recorded in accumulated other comprehensive income (“AOCI”).
The change in the fair value of the interest rate swap agreements for the six months ended June 30, 2022, resulted in an unrealized gain of $0.4 million, and was included in OCI net of taxes. The change in the fair value of the interest rate swap agreements for the three and six months ended June 30, 2021, resulted in an unrealized gain of $0.4 million and an unrealized gain of $0.9 million, respectively, which were included in AOCI net of taxes. The Company paid $0.4 million of net interest on the settlement of the interest rate swap agreements for the six months ended June 30, 2022. The Company paid $0.5 million and $0.9 million of net interest on the settlement of the interest rate swap agreements for each of the three and six months ended June 30, 2021, respectively. As a result of the expiration of the interest rate swaps on March 31, 2022, no gain or loss was recorded in operations for the three and six months ended June 30, 2022. No gain or loss was recorded in operations for the three and six months ended June 30, 2021. The aggregate fair value of the interest rate swaps was $0.4 million as of December 31, 2021 and was recorded in other long-term liabilities on the accompanying Condensed Consolidated Balance Sheets.
Note 10. Fair Value Measurements
Our derivatives are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.
The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure fair value, which include derivatives designated as cash flow hedging instruments, as well as their location on our accompanying Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (amounts in thousands):
Estimated Fair Value | ||||||||||||
June 30, 2022 | ||||||||||||
Category |
| Balance Sheet Location |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||
Cash flow hedges: |
|
|
|
|
|
|
|
|
| |||
Interest rate swap | Other long-term liabilities |
| — | — |
| — | — | |||||
Estimated Fair Value | ||||||||||||
December 31, 2021 | ||||||||||||
Category |
| Balance Sheet Location |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||
Cash flow hedges: |
|
| ||||||||||
Interest rate swap | Other long-term liabilities |
| — | $ | 439 |
| — | $ | 439 | |||
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Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, goodwill, other intangible assets, and equity method investments.
The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of these items. The carrying value of the long-term debt approximates fair value because this instrument bears interest at a variable rate, is pre-payable, and is at terms currently available to the Company.
Note 11. Stockholders’ Equity
Capital stock
As of June 30, 2022, the Company had 20,827,861 shares of Class A common stock, and 19,720,381 shares of Class B common stock, and outstanding.
Equity incentive plans
Effective May 25, 2021, the stockholders of all classes of capital stock of the Company approved at the annual stockholder meeting the Hemisphere Media Group, Inc. Amended and Restated 2013 Equity Incentive Plan (the “Equity Incentive Plan”) to increase the number of shares of Class A common stock that may be delivered under the Equity Incentive Plan to an aggregate of 10.2 million shares of our Class A common stock. At June 30, 2022, 2.9 million shares remained available for issuance of stock options or other stock based awards under our Equity Incentive Plan (including shares of restricted Class A common stock surrendered to the Company in payment of taxes required to be withheld in respect of vested shares of restricted Class A common stock, which are available for re-issuance). The expiration date of the Equity Incentive Plan, on and after which date no awards may be granted, is April 4, 2023. The Company’s Board of Directors, or a committee thereof, administers the Equity Incentive Plan and has the sole and plenary authority to, among other things: (i) designate participants; (ii) determine the type, size, and terms and conditions of awards to be granted; and (iii) determine the method by which an award may be settled, exercised, canceled, forfeited or suspended.
The Company’s time-based restricted stock awards and option awards generally vest in three equal annual installments beginning on the first anniversary of the grant date, subject to the grantee’s continued employment or service with the Company. The Company’s performance-based restricted stock awards and option awards vest based on the achievement of certain non-market-based performance metrics of the Company, subject to the grantee’s continued employment or service with the Company. The event based restricted stock awards granted to certain members of our Board vest on the day preceding the Company’s annual shareholder meeting.
Stock-based compensation
Stock-based compensation expense relates to both stock options and restricted stock. Stock-based compensation expense was $0.8 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively, and $2.2 million and $2.8 million for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, there was $2.2 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.9 years. At June 30, 2022, there was $3.7 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.8 years.
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Stock options
The fair value of stock options granted is estimated at the date of grant using the Black-Scholes pricing model for time-based options and performance-based options. The expected term of options granted is derived using the simplified method under ASC 718 10 S99 1/SEC Topic 14.D for “plain vanilla” options. As of January 1, 2022, the Company determined that it had sufficient trading history to provide a reliable measure of expected volatility. As a result, the Company transitioned from peer group volatility to the Company’s historical volatility as a basis for expected volatility. The risk free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. As of January 1, 2022, the Company determined that it had sufficient historical data to utilize its own forfeiture rate. As a result, the Company transitioned from an estimated forfeiture rate of 1.5% to a historical forfeiture rate of 2.6%. The Company has assumed no dividend yield, as dividends have never been paid to stock or option holders and will not be paid for the foreseeable future.
The following table summarizes stock option activity for the six months ended June 30, 2022 (shares and intrinsic value in thousands):
The weighted average grant date fair value of options granted for the six months ended June 30, 2022 was $2.26. At June 30, 2022, 0.3 million options granted and included in the table above are unvested performance-based options.
Restricted stock
Certain employees and directors have been awarded restricted stock under the Equity Incentive Plan. The time-based restricted stock grants vest primarily over a period of three years. Performance-based restricted stock grants vest over a period of three years upon satisfaction of the performance condition.
The following table summarizes restricted share activity for the six months ended June 30, 2022 (shares in thousands):
Number of | Weighted-average | ||||
| shares |
| grant date fair value | ||
Outstanding at December 31, 2021 | 614 | $ | 11.79 | ||
Granted | 285 | 6.09 | |||
Vested | (329) | 12.09 | |||
Forfeited | (59) | 12.00 | |||
Outstanding at June 30, 2022 | 511 |
| $ | 8.40 | |
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Non-controlling interest
Effective July 15, 2021, the Company entered into an omnibus modification agreement with Snap Distribution, Inc., a British Virgin Islands company, pursuant to which Snap Distribution, Inc. relinquished the non-controlling 25% interest in Snap Media, at which point Snap Media became a wholly owned subsidiary of the Company. The Company recorded the relinquishment of this non-controlling interest by Snap Distribution, Inc. as a transaction between shareholders with no gain or loss reported.
Note 12. Contingencies
We are involved in various legal actions, generally related to our operations. Management believes, based on advice from legal counsel, that the outcomes of such legal actions will not adversely affect our financial condition.
Note 13. Leases
The Company is a lessee under leases for office space, land and equipment with third parties, all of which are accounted for as operating leases. These leases generally have an initial term of to seven years and provide for fixed monthly payments. Some of these leases provide for future rent escalations and renewal options and certain leases also obligate us to pay the cost of maintenance, insurance and property taxes. Total lease cost was $0.3 million for the each of the three months ended June 30, 2022 and 2021, respectively, and $0.5 million for each of the the six months ended June 30, 2022 and 2021, respectively. Leases with a term of one year or less are classified as short-term and are not recognized in the Condensed Consolidated Balance Sheets.
A summary of the classification of operating leases on our Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (amounts in thousands):
| June 30, |
| December 31, | |||||
| 2022 | 2021 | ||||||
Operating lease right-of-use assets |
| $ | 1,027 | $ | 1,281 | |||
Operating lease liability, current |
| 605 |
| 538 | ||||
Operating lease liability, non-current | $ | 587 | $ | 890 | ||||
The decrease in lease assets and liabilities as of June 30, 2022 is due to the Held for Sale classification of Pantaya's assets and liabilities. For more information, see Note 4, "Held for Sale" of Notes to Condensed Consolidated Financial Statements.
Components of lease cost reflected in our Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022 and 2021 (amounts in thousands):
Three months ended June 30, | ||||||
| 2022 |
| 2021 | |||
Operating lease cost | $ | 203 | $ | 168 | ||
Short-term lease cost |
| 49 |
| 135 | ||
Total lease cost | $ | 252 | $ | 303 | ||
Six months ended June 30, | ||||||
| 2022 |
| 2021 | |||
Operating lease cost | $ | 397 | $ | 337 | ||
Short-term lease cost |
| 93 |
| 178 | ||
Total lease cost | $ | 490 | $ | 515 | ||
A summary of weighted-average remaining lease term and weighted-average discount rate as of June 30, 2022:
Weighted-average remaining lease term |
| 2.7 | years |
Weighted average discount rate |
| 6.0 | % |
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Supplemental cash flow and other non-cash information for the six months ended June 30, 2022 and 2021 (amounts in thousands):
Six months ended June 30, | ||||||
| 2022 |
| 2021 | |||
Operating cash flows from operating leases | $ | 352 | $ | 304 | ||
Future annual minimum lease commitments as of June 30, 2022 were as follows (amounts in thousands):
| June 30, 2022 | ||
Remainder of 2022 | $ | 333 | |
2023 |
| 517 | |
2024 |
| 232 | |
2025 |
| 146 | |
2026 |
| 58 | |
Total minimum payments | $ | 1,286 | |
Less: amount representing interest |
| (95) | |
Lease liability | $ | 1,191 | |
Note 14. Commitments
The Company has other commitments, primarily related to programming, in addition to the various operating leases included in Note 13, “Leases” of Notes to Condensed Consolidated Financial Statements.
Future minimum payments as of June 30, 2022, are as follows (amounts in thousands):
| June 30, 2022 | ||
Remainder of 2022 | $ | 24,224 | |
2023 |
| 7,664 | |
2024 |
| 4,653 | |
2025 |
| 1,758 | |
2026 and thereafter |
|
| 417 |
Total | $ | 38,716 | |
Note 15. Subsequent Events
On July 1, 2022, the Company sold its 25.5% ownership interest in REMEZCLA, a digital media company targeting English speaking and bilinigual U.S. Hispanic millennials through innovative content, for $3.0 million in cash.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our Company
We are a leading U.S. Spanish-language media company serving the fast growing and highly attractive U.S. Hispanic and Latin American markets with a premium Spanish-language streaming platform distributed in the U.S., five Spanish-language cable television networks distributed in the U.S., two Spanish-language cable television networks distributed in Latin America, the #1-rated broadcast television network in Puerto Rico, a leading distributor of content to television and digital media platforms in Latin America and a 40% interest in the #3-rated broadcast television network in Colombia.
Headquartered in Miami, Florida, our portfolio consists of the following:
| ● | Pantaya: the first ever premium subscription streaming service of Spanish-language media offering the largest selection of current and classic, commercial free blockbusters and exclusive rights to critically acclaimed movies and series from Latin America and the U.S. including original productions and titles from our library, as well as titles from third party producers. The Company formed Pantaya in partnership with Lionsgate and launched the service in August 2017 with a 25% equity interest. On March 31, 2021, the Company acquired the remaining 75% equity interest from Lionsgate, and Pantaya is now a wholly-owned consolidated subsidiary of the Company. As of June 30, 2022, Pantaya had close to one million subscribers. On May 9, 2022, the Company entered into an agreement to sell Pantaya to TelevisaUnivision. For more information, see Note 4, “Held for Sale” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report. |
| ● | Cinelatino: the leading Spanish-language cable movie network with approximately 3.3 million(1) subscribers in the U.S. and 13.3 million(1) subscribers across Latin America and Canada. Cinelatino is programmed with a lineup featuring the best contemporary films and original television series from Mexico, Latin America, and the United States. Driven by the strength of its programming and distribution, Cinelatino is the highest rated Spanish-language original movie network in the U.S. |
| ● | WAPA: the leading broadcast television network and television content producer in Puerto Rico. WAPA has been the #1-rated broadcast television network in Puerto Rico since the start of Nielsen audience measurement twelve years ago. WAPA is Puerto Rico’s news leader and the largest local producer of news and entertainment programming, producing over 70 hours in the aggregate each week. Additionally, we operate WAPA.TV, a leading news and entertainment website in Puerto Rico, as well as mobile apps, featuring content produced by WAPA. |
| ● | WAPA Deportes: through its multicast signal, WAPA distributes WAPA Deportes, a leading sports television network in Puerto Rico, featuring Major League Baseball (MLB), National Basketball Association (NBA) and professional sporting events from Puerto Rico. |
| ● | WAPA America: a cable television network serving primarily Puerto Ricans and other Caribbean Hispanics living in the U.S. WAPA America’s programming features news and entertainment programming produced by WAPA. WAPA America is distributed in the U.S. to over 3.2 million(1) subscribers. |
| ● | Pasiones: a cable television network dedicated to showcasing the most popular telenovelas and serialized dramas, distributed in the U.S. and Latin America. Pasiones features top-rated telenovelas from Latin America, Turkey, India, and South Korea (dubbed into Spanish), and is currently the highest rated telenovela cable television network in primetime. Pasiones has approximately 3.6 million(1) subscribers in the U.S. and 15.4 million(1) subscribers in Latin America. |
| ● | Centroamerica TV: a cable television network targeting Central Americans living in the U.S., the third largest U.S. Hispanic group and the fastest growing segment of the U.S. Hispanic population. Centroamerica TV features the most popular news and entertainment from Central America, as well as soccer programming from the top professional soccer leagues in the region. Centroamerica TV is distributed in the U.S. to approximately 3.1 million(1) subscribers. |
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| ● | Television Dominicana: a cable television network targeting Dominicans living in the U.S., the fourth largest U.S. Hispanic national group. Television Dominicana airs the most popular news and entertainment programs from the Dominican Republic, as well as the Dominican Republic professional baseball league, featuring current and former players from MLB. Television Dominicana is distributed in the U.S. to approximately 2.2 million(1) subscribers. |
| ● | Snap Media: a distributor of content to broadcast and cable television networks and OTT, SVOD and AVOD platforms in Latin America. On November 26, 2018, we acquired a 75% interest in Snap Media, and in connection with the acquisition, Snap Media entered into a joint venture with MarVista, an independent entertainment studio and a shareholder of Snap Media, to produce original movies and series. Snap Media is responsible for the distribution of content owned and/or controlled by our Networks, as well as content to be produced by the production joint venture between Snap Media and MarVista. On July 15, 2021, the Company entered into an omnibus agreement, pursuant to which, minority shareholders relinquished the 25% non-controlling interest in Snap Media, at which point Snap Media became a wholly owned subsidiary of the Company. |
| ● | Canal 1: the #3-rated broadcast television network in Colombia. We own a 40% interest in Canal 1 in partnership with leading producers of news and entertainment content in Colombia. The partnership was awarded a 10-year renewable broadcast television concession in 2016. The partnership began operating Canal 1 on May 1, 2017 and launched a new programming lineup on August 14, 2017. In July 2019, the Colombian government enacted legislation resulting in the extension of the concession license for an additional ten years for no additional consideration. The concession is now due to expire on April 30, 2037 and is renewable for an additional 20-year period. |
| ● | REMEZCLA: a digital media company targeting English speaking and bilingual U.S. Hispanic millennials through innovative content. On April 28, 2017, we acquired a 25.5% interest in REMEZCLA. For more information, see Note 15, “Subsequent Events” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report. |
(1)Subscriber amounts are based on most recent remittances received from our Distributors as of the period end date, which are typically two months prior to the period end date.
Our two primary sources of revenues are advertising revenue and subscriber revenue. All of our Networks derive revenues from advertising. Advertising revenue is generated from the sale of advertising time, which is typically sold pursuant to advertising orders with advertisers. Our advertising revenue is tied to the success of our programming, including the popularity of our programming with our target audience. Our advertising is variable in nature and tends to reflect seasonal patterns of our advertisers’ demand, which is generally greatest during the fourth quarter of each year, driven by the holiday buying season. In addition, Puerto Rico’s political election cycle occurs every four years and we benefit from political advertising in an election year. For example, in 2020, we experienced higher advertising sales as a result of political advertising spending during the 2020 Puerto Rico gubernatorial elections. Elections in Puerto Rico occur every 4 years.
All of our Networks receive fees paid by Distributors. These revenues are generally based on a per subscriber fee pursuant to multi-year contracts, commonly referred to as “affiliation agreements,” which typically provide for annual rate increases. The specific subscriber revenue we earn varies from period to period, Distributor to Distributor and also varies among our Networks, but is generally based upon the number of each Distributor’s paying subscribers who receive our Networks. The terms of certain non-U.S. affiliation agreements provide for payment of a fixed contractual monthly fee. Changes in subscriber revenue at our Networks are primarily derived from changes in contractual affiliation rates charged for our Networks and changes in the number of subscribers. Distributors report their subscriber numbers to our Networks generally on a two month lag. We record revenue based on estimates of the number of subscribers utilizing the most recently received remittance reporting of each MVPD, which is consistent with our past practice and industry practice. Revenue is recognized on a month by month basis when the performance obligations to provide service to the Distributors is satisfied. Payment is typically due and received within sixty days of the remittance. We also generate subscriber revenue from subscriptions to Pantaya, our streaming platform. Pantaya is available directly to consumers through our web application as well as through distribution partners. Certain distribution partners charge a fee, which is recorded in cost of revenues. Subscribers are billed at the start of their monthly or annual membership and revenue is recognized ratably over each applicable membership period. Subscriber revenue varies from period to period and is generally based upon the number of paying subscribers to our streaming platform. Estimates of revenue generated but not yet reported by the Company’s third party Distributors are made based on the
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estimated number of subscribers using the most recently received remittance reporting from each Distributor, which is consistent with our past practice and industry practice.
WAPA has been the #1-rated broadcast television network in Puerto Rico since the start of Nielsen audience measurement twelve years ago and management believes it is highly valued by its viewers and cable, satellite and telecommunications service providers. WAPA is distributed by all pay-TV distributors in Puerto Rico and has been successfully growing affiliate revenue. WAPA’s primetime household rating for the year ended December 31, 2021 was nearly four times higher than the most highly rated English-language U.S. broadcast network in the U.S., CBS, and higher than the combined ratings of CBS, NBC, ABC, FOX and the CW. As a result of its ratings success since the start of Nielsen audience measurement, management believes WAPA is well positioned for future growth in subscriber revenue.
WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a valuable and unique position, as they are among the small group of Hispanic cable networks to have achieved broad distribution in the U.S. As a result, management believes our U.S. cable networks are well-positioned to benefit from growth in both the growing national advertising spend targeted at the highly sought-after U.S. Hispanic cable television audience, and growth in the U.S. Hispanic population, which is expected to continue its long-term upward trajectory.
Hispanics represent 18% of the total U.S. television household population and 11% of the total U.S. buying power, but the aggregate linear television media spend targeted at U.S. Hispanics significantly under-indexes both of these metrics. As a result, advertisers have been allocating a higher proportion of marketing dollars to the Hispanic market.
Management expects our U.S. networks to benefit from growth in the U.S. Hispanic population, as it continues its long-term growth. According to the 2020 U.S. Census, nearly 62.1 million Hispanics resided in the United States in 2020, representing an increase of more than 27 million people between 2000 and 2020, and that number is projected to grow to approximately 75 million by 2030. U.S. Hispanic television households grew by 35% during the period from 2010 to 2021, from 12.9 million households to 17.5 million households.
Similarly, management expects Cinelatino and Pasiones to benefit from growth in Latin America. Pay-TV subscribers in Latin America (excluding Brazil) are projected to grow from 53 million in 2021 to 60 million by 2025. Furthermore, as of December 31, 2021, Cinelatino and Pasiones were distributed to approximately 26% and 29% of total pay-TV subscribers throughout Latin America (excluding Brazil), respectively.
Colombia, where we own 40% of Canal 1, the #3-rated broadcast television network, is a large and appealing market for broadcast television. Colombia had an estimated population of 51.6 million as of January 1, 2022, the second largest in Latin America (excluding Brazil). According to IBOPE, the three major broadcast networks in Colombia receive a 55% share of overall viewing. According to ASOMEDIOS, the free-to-air television advertising market was approximately $256 million for 2021 (as converted utilizing the average foreign exchange rate during the period).
MVS, one of our stockholders, provides operational, technical and distribution services to Cinelatino pursuant to several agreements, including an agreement pursuant to which MVS provides satellite and technical support and other administrative support services, an agreement that grants MVS the non-exclusive right to distribute the Cinelatino service to third party distributors in Mexico, and an agreement between Cinelatino and Dish Mexico (an affiliate of MVS), pursuant to which Dish Mexico distributes Cinelatino and pays subscriber fees to Cinelatino. While some of these agreements have expired, we are continuing to operate as though these agreements are in effect while we negotiate their renewals (which may be on different terms).
As of January 31, 2022, Univision Holdings II, Inc., together with its wholly-owned subsidiary, Univision Communications, Inc. and Grupo Televisa, S.A.B. (“Televisa”) completed a merger to establish a new combined company named TelevisaUnivision, Inc. (“TelevisaUnivision”). The Company has various agreements with TelevisaUnivision (including its various divisions and affiliates), which has directors in common with the Company (who may hold a material financial interest in TelevisaUnivision).
29
Comparison of Consolidated Operating Results for the Three and Six Months Ended June 30, 2022 and 2021
(Unaudited)
(amounts in thousands)
Three Months Ended | $ Change | % Change | Six Months Ended | $ Change | % Change |
| |||||||||||||||||
June 30, | Favorable/ | Favorable/ | June 30, | Favorable/ | Favorable/ |
| |||||||||||||||||
| 2022 |
| 2021 |
| (Unfavorable) |
| (Unfavorable) |
| 2022 |
| 2021 |
| (Unfavorable) |
| (Unfavorable) |
| |||||||
Net revenues | $ | 54,174 | $ | 50,460 |
| $ | 3,714 |
| 7.4 | % | $ | 102,973 | $ | 88,037 |
| $ | 14,936 |
| 17.0 | % | |||
Operating expenses: |
|
|
|
|
|
|
| ||||||||||||||||
Cost of revenues |
| 18,348 |
| 14,798 |
| (3,550) |
| (24.0) | % |
| 33,473 |
| 26,577 |
| (6,896) |
| (25.9) | % | |||||
Selling, general and administrative |
| 25,911 |
| 24,908 |
| (1,003) |
| (4.0) | % |
| 56,569 |
| 36,299 |
| (20,270) |
| (55.8) | % | |||||
Depreciation and amortization |
| 3,335 |
| 4,337 |
| 1,002 |
| 23.1 | % |
| 10,964 |
| 7,002 |
| (3,962) |
| (56.6) | % | |||||
Other expenses |
| 8,939 |
| 1,363 |
| (7,576) |
| NM |
| 10,057 |
| 8,091 |
| (1,966) |
| (24.3) | % | ||||||
(Gain) from FCC spectrum repack and other |
| (95) |
| (2,124) |
| (2,029) |
| (95.5) | % |
| (141) |
| (2,176) |
| (2,035) |
| (93.5) | % | |||||
Total operating expenses |
| 56,438 |
| 43,282 |
| (13,156) |
| (30.4) | % |
| 110,922 |
|
| 75,793 |
| (35,129) |
| (46.3) | % | ||||
Operating (loss) income |
| (2,264) |
| 7,178 |
| (9,442) |
| NM |
| (7,949) |
| 12,244 |
| (20,193) |
| NM | |||||||
Other (expense) income: |
|
|
|
|
|
|
|
| |||||||||||||||
Interest expense and other, net |
| (3,111) |
| (3,165) |
| 54 |
| 1.7 | % |
| (6,275) |
| (5,523) |
| (752) |
| (13.6) | % | |||||
Gain (loss) on equity method investment activity |
| 2,283 |
| (8,569) |
| 10,852 |
| NM |
| (2,489) |
| 24,040 |
| (26,529) |
| NM | |||||||
Other expense, net | — | — | — | NM | — | (668) | 668 | 100.0 | % | ||||||||||||||
Total other (expense) income |
| (828) |
| (11,734) |
| 10,906 |
| 92.9 | % |
| (8,764) |
| 17,849 | (26,613) |
| NM | |||||||
(Loss) income before income taxes |
| (3,092) |
| (4,556) |
| 1,464 |
| 32.1 | % |
| (16,713) |
| 30,093 |
| (46,806) |
| NM | ||||||
Income tax expense |
| (819) |
| (1,785) |
| 966 |
| 54.1 | % |
| (426) |
| (3,053) |
| 2,627 |
| 86.0 | % | |||||
Net (loss) income |
| (3,911) |
| (6,341) |
| 2,430 |
| 38.3 | % |
| (17,139) |
| 27,040 |
| (44,179) |
| NM | ||||||
Net loss attributable to non-controlling interest |
| — |
| 55 |
| (55) |
| (100.0) | % |
| — |
| 32 |
| (32) |
| (100.0) | % | |||||
Net (loss) income attributable to Hemisphere Media Group, Inc. | $ | (3,911) | $ | (6,286) |
| $ | 2,375 |
| 37.8 | % | $ | (17,139) | $ | 27,072 | $ | (44,211) |
| NM | |||||
NM = Not meaningful
Net Revenues
Net revenues were $54.2 million for the three months ended June 30, 2022, an increase of $3.7 million, or 7%, as compared to $50.5 million for the comparable period in 2021. Subscriber revenue decreased $0.2 million, or 1%, primarily due to a decline in U.S. cable subscribers, offset in part by contractual rate increases and new launches of our Cable Networks. Advertising revenue decreased $0.2 million, or 1%, driven by a decline in ad sales at our Cable Networks. Other revenue increased $4.1 million driven primarily by the licensing of content to third parties.
30
Net revenues were $103.0 million for the six months ended June 30, 2022, an increase of $14.9 million, or 17%, as compared to $88.0 million for the comparable period in 2021, primarily due to the inclusion of Pantaya, which the Company acquired on March 31, 2021. Subscriber revenue increased $12.0 million, or 23%, primarily due to the inclusion of Pantaya. Advertising revenue decreased $0.1 million, driven by a decline in ad sales at our Cable Networks. Other revenue increased $3.0 million driven primarily by the licensing of content to third parties.
Operating Expenses
Cost of revenues consists primarily of programming and production costs, programming amortization, technical and streaming delivery costs and distribution fees. Cost of revenues for the three months ended June 30, 2022, were $18.3 million, an increase of $3.6 million, or 24%, compared to $14.8 million for the comparable period in 2021, due to programming costs related to content licensed to third parties. Cost of revenues for the six months ended June 30, 2022, were $33.5 million, an increase of $6.9 million, or 26%, compared to $26.6 million for the comparable period in 2021, due the inclusion of Pantaya and programming costs related to content licensed to third parties.
Selling, General and Administrative: Selling, general and administrative expenses consist principally of marketing, research, employee costs, stock-based compensation, and other general administrative costs. Selling, general, and administrative expenses for the three months ended June 30, 2022, were $25.9 million, an increase of $1.0 million or 4%, compared to $24.9 million for the comparable period in 2021, due to higher personnel costs, offset in part by a decrease in stock compensation. Selling, general, and administrative expenses for the six months ended June 30, 2022, were $56.5 million, an increase of $20.3 million, or 56%, compared to $36.3 million for the comparable period in 2021, due the inclusion of Pantaya, including higher marketing and personnel costs, offset in part by a decrease in stock compensation.
Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization for the three months ended June 30, 2022, was $3.3 million, a decrease of $1.0 million, or 23%, compared to $4.3 million for the comparable period in 2021. Depreciation and amortization for the six months ended June 30, 2022, was $11.0 million, an increase of $4.0 million, or 57%, compared to $7.0 million for the comparable period in 2021. For the three months period ended June 30, 2022, the decrease is primarily due to the amortization of certain intangible assets that were fully amortized in the prior quarter. For the six months period ended June 30, 2022, the increase was primarily due to the amortization of intangible assets recognized as part of the acquisition of Pantaya, offset in part by the amortization of certain intangible assets that were fully amortized in during the prior year.
Other Expenses: Other expenses include legal and financial advisory fees, and other fees incurred in connection with transactions and corporate finance activities, including debt and equity financings. Other expenses for the three months ended June 30, 2022, were $8.9 million, an increase of $7.6 million, compared to $1.4 million in the comparable period in 2021, due to transaction expenses related to the announced transactions. Other expenses for the six months ended June 30, 2022, were $10.1 million, an increase of $2.0 million, compared to $8.1 million in the comparable period in 2021, due to transaction expenses related to the announced transactions, offset in part by the expenses incurred in connection with the acquisition of Pantaya and the incremental borrowing on our Third Amended Term Loan Facility.
Gain from FCC repack and other: Gain from FCC spectrum repack and other primarily reflects reimbursements we have received from the FCC for equipment purchased as a result of the FCC spectrum repack, and gain or loss from the sale of assets no longer utilized in the operations of the business. Gain from FCC spectrum repack and other for the three months ended June 30, 2022, was $0.1 million as compared to $2.1 million in the comparable period of 2021. Gain from FCC spectrum repack and other for the six months ended June 30, 2022, was $0.1 million as compared to $2.2 million in the comparable period of 2021. These decreases were due to reimbursements received in the prior year period from the FCC for equipment purchases required as a result of the FCC spectrum repack and the disposal of assets no longer utilized in the operations of the business during the prior year period.
Other Expenses
Interest Expense and other, net: Interest Expense and other, net: Interest expense for the three months ended June 30, 2022, decreased $0.1 million, or 2%, due to the expiration of our interest rate swaps on March 31, 2022, offset in part by higher average interest rates in the current year period. Interest expense for the six months ended June 30, 2022, increased $0.8 million, or 14%, due to the incremental borrowing on our Third Amended Term Loan Facility on March 31, 2021, offset in part by the expiration of our interest rate swaps.
31
Gain (Loss) on Equity Method Investment Activity: Gain on equity method investment activity for the three months ended June 30, 2022, was $2.3 million, an improvement of $10.9 million compared to a loss of $8.6 million for the comparable period in 2021, due to lower losses at Canal 1 as a result of unrealized foreign currency gains on U.S. dollar denominated obligations and improved operating results. Loss on equity method investment activity for the six months ended June 30, 2022, was $2.5 million, as compared to a gain of $24.0 million for the comparable period in 2021, primarily due to a $30.1 million one-time non-cash gain recognized on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest on March 31, 2021.
Other expense, net: Other expense, net for the six months ended June 30, 2022, was $0 million, a decrease of $0.7 million, compared to an expense of $0.7 million in the comparable period in 2021, which reflected the write-off of the net book value of programming licensed from Pantaya prior to the Acquisition Date.
Income Tax Expense
Income tax expense for the three months ended June 30, 2022, was $0.8 million as compared to $1.8 million for the comparable period in 2021. Income tax expense for the six months ended June 30, 2022, was $0.4 million as compared to $3.1 million for the comparable period in 2021. For more information, see Note 7, “Income Taxes” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Net (Loss) Income
Net loss for the three months ended June 30, 2022, was $3.9 million as compared to $6.3 million for the comparable period in 2021. Net loss for the six months ended June 30, 2022, was $17.1 million as compared to net income of $27.0 million for the comparable period in 2021, as the prior year period benefitted from a one-time non-cash gain of $30.1 million recognized on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest.
Net Loss Attributable to Non-controlling Interest
Net loss attributable to non-controlling interest, related to the 25% interest in Snap Media held by minority shareholders, for the three months ended June 30, 2022, was $0 million as compared to $0.1 million for the comparable period in 2021. Net loss attributable to non-controlling interest, related to the 25% interest in Snap Media held by minority shareholders, for the six months ended June 30, 2022, was $0 million as compared to $0.0 million for the comparable period in 2021. Effective July 15, 2021, the Company entered into an omnibus modification agreement with Snap Distribution, Inc., a British Virgin Islands company, pursuant to which Snap Distribution, Inc. relinquished the non-controlling 25% interest in Snap Media, at which point Snap Media became a wholly owned subsidiary of the Company. For more information, see Note 6, “Equity Method Investments” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
Net (Loss) Income Attributable to Hemisphere Media Group, Inc.
Net loss available to Hemisphere Media Group, Inc. for the three months ended June 30, 2022, was $3.9 million as compared to $6.3 million for the comparable period in 2021. Net loss available to Hemisphere Media Group, Inc. for the six months ended June 30, 2022, was $17.1 million as compared to net income of $27.1 million for the comparable period in 2021.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our principal sources of cash are cash on hand, borrowings under our revolving credit facility and cash flows from operating activities and capacity under our revolving loan (“Revolving Facility”). At June 30, 2022, we had $28.9 million of cash on hand and $30 million undrawn and available under our revolving credit facility. Our primary uses of cash include the production and acquisition of programming, operational costs, personnel costs, equipment purchases, principal and interest payments on our outstanding debt and income tax payments, and cash may be used to fund investments and acquisitions.
Management believes cash on hand, cash flow from operations and availability under our Revolving Facility will provide sufficient liquidity to meet our current contractual financial obligations and to fund anticipated working capital and capital expenditure requirements for existing operations. Our current financial obligations include maturities of debt, commitments from the ordinary
32
course of business that require cash payments to vendors and suppliers, particularly for programming, operating leases and other commitments. However, we do not expect to generate sufficient cash flow from operations to repay at maturity the entirety of the then outstanding balances of our debt. As a result, we will then be dependent upon our ability to access the capital and credit markets in order to repay or refinance the outstanding balances of our indebtedness. Failure to raise significant amounts of funding to repay these obligations at maturity would adversely affect our business. In such a circumstance, we would need to take other actions including selling assets, seeking strategic investments from third parties or reducing other discretionary uses of cash.
Cash Flows
Six Months Ended June 30, | ||||||
Amounts in thousands: |
| 2022 |
| 2021 | ||
Cash provided by (used in): |
|
|
|
| ||
Operating activities | $ | (17,047) | $ | 19,899 | ||
Investing activities |
| (2,141) |
| (124,859) | ||
Financing activities |
| (1,395) |
| 42,928 | ||
Net decrease in cash | $ | (20,583) | $ | (62,032) | ||
Comparison for the Six Months Ended June 30, 2022 and June 30, 2021
Operating Activities
Cash used in operating activities was primarily driven by our net income or loss, adjusted for non-cash items and changes in working capital. Non-cash items consist primarily of depreciation of property and equipment, amortization of intangibles, programming amortization, amortization of deferred financing costs, stock-based compensation expense, gain or loss on equity method investment activity, amortization of operating lease right-of-use assets, provision for bad debts.
Net cash used in operating activities for the six months ended June 30, 2022 was $17.0 million, a decrease of $36.9 million, as compared to provided by $19.9 million in the prior year period, due to a decrease in net loss of $44.2 million and a decrease in net working capital of $24.0 million, offset in part by an increase in non-cash items of $31.3 million. The decrease in net working capital is due increases in programming rights of $9.9 million, prepaids and other assets of $3.5 million, due from related parties of $1.3 million and accounts receivable of $0.5 million and decreases in accounts payable of $9.3 million, income taxes payable of $3.5 million, and other liabilities of $0.1 million, offset in part by increases in programming rights payable of $2.8 million and other accrued expenses of $1.3 million. The increase in non-cash items is due to a $26.5 million increase in loss on equity method investment activity primarily due to a $30.1 million one-time gain recognized in the prior year period on the existing 25% equity interest in Pantaya upon the step acquisition of the remaining 75% equity interest, and increases in depreciation and amortization of $4.0 million, programming amortization of $3.4 million, and a decrease in the gain from FCC spectrum repack of $2.2 million, offset in part by an increase in deferred taxes of $3.1 million and other non-cash acquisition related charges of $1.3 million in the prior year period.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022, was $2.1 million, an improvement of $122.7 million as compared to $124.9 million in the prior year period. The improvement was primarily due to the net cash paid in the prior year period for the acquisition of Pantaya of $122.6 million.
Financing Activities
Net cash used in financing activities for the six months ended June 30, 2022, was $1.4 million, a decrease of $44.3 million as compared to net cash provided by of $42.9 million in the prior year period. The decrease is due to net proceeds of $47.4 million received from incremental borrowing under our Third Amended Term Loan Facility in connection with the acquisition of Pantaya in the prior year period.
For more information, see Note 8, “Long-Term Debt” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.
33
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by management and the related disclosures have been reviewed with the Audit Committee of our Board of Directors. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures, as of June 30, 2022. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Changes in Internal Controls
There were no changes to the Company’s internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we or our subsidiaries may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgments about future events. An adverse result in these or other matters may arise from time to time that may harm our Business. Neither we nor any of our subsidiaries are presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us or our subsidiaries, which may materially affect us.
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2021, in addition to other information included in this Quarterly Report on Form 10-Q, including under the section entitled, “Forward-Looking Statements,” and in other documents we file with the SEC, in evaluating our Company and our Business. If any of the risks occur, our Business, financial condition, liquidity and results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our Business or the extent to which any factor or combination of factors may impact our Business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our Business, financial condition and/or operating results.
There have not been any material changes during the quarter ended June 30, 2022 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
35
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
36
ITEM 6. EXHIBITS
The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report.
Exhibit Index
Exhibit No. |
| Description of Exhibit |
|---|---|---|
|
|
|
2.1 | ||
2.2 | ||
2.3 | ||
2.4 | ||
31.1# | ||
31.2# |
| |
32.1*# |
| |
32.2*# |
| |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase |
101.DEF |
| XBRL Taxonomy Extension Definition Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and forwarded to the SEC or its staff upon request. |
# | Filed herewith. |
± | Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules or exhibits upon request by the SEC. |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEMISPHERE MEDIA GROUP, INC. | |
|
|
|
|
|
|
DATE: August 08, 2022 | By: | /s/ Alan J. Sokol |
|
| Alan J. Sokol |
|
| Chief Executive Officer and President |
|
| (Principal Executive Officer) |
|
|
|
|
|
|
DATE: August 08, 2022 | By: | /s/ Craig D. Fischer |
|
| Craig D. Fischer |
|
| Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |
38
1 Year Hemisphere Media Chart |
1 Month Hemisphere Media Chart |
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